July 20, 2009
Dear Securities Exchange Commission:
I want to voice my concern about the proposed expansion of costly surprise audits to include advisors who solely debit quarterly fees from clients accounts at qualified custodians. This rule change would not be in the clients best interest because its negative side effects would significantly outweigh any potential benefits.
First, surprise audits are not necessarily an effective way to protect consumers. After all, Madoff used an independent accounting firm to do audits, and his Ponzi scheme went undetected. Independent audits were not what was needed to protect the public from Madoff. What was needed was for the SEC to have the resources, desire, and independence to detect fraud. The real issue is not a lack of rules, but a lack of enforcement by a financially strapped SEC. A better solution to broadly protect investors would be raising annual RIA fees to support more rigorous enforcement of the rules already in place.
If Madoff had been using an independent qualified custodian, his fraud would not have gone unnoticed. The current rules that exempt advisors who have client assets at an independent qualified custodian have worked extremely well to protect clients.
Second, subjecting firms that only debit fees from independent custodians to expensive audits would unduly burden small advisors and their clients as compliance costs for small advisory firms would skyrocket. The Financial Planning Association in their June 5, 2009 press release estimated that the costs for small investment advisors would range from $10,000 to $20,000. Clients would almost certainly suffer as advisory firms are forced to raise their fees. Worse, it might lessen the number of firms that work with middle income Americans because they would become less profitable as advisory firms compliance costs rise.
Another negative side effect of the new rule would be that it would stifle competition as it would make doing business as an independent advisory firm less profitable. Large advisory firms with big budgets would be much more able to absorb the costs of independent surprise audits. Regulation as costly as the proposed rule is certain to have adverse consequences on the viability of independent advisory practices, which in turn would hurt the middle income public looking for advice.
I hope for clients and advisors alike that the SEC keeps the current rules in place that exempt advisors from expensive, needless third party surprise audits.
Charles E. Scott Brewster